2 High Yielding Stocks for a Lifetime of Passive Income

Andrii Dodonov

Co-produced by Austin Rogers for High Yield Investor

The world is starving for energy

The International Energy Administration predicts that global energy demand will increase by 47% over the next 30 years.

Unless there is massive technology breakthrough, this virtually guarantees that all sources of power generation except coal will see growth during this period.

growth in energy demand

CAPP

Although renewables like wind and solar are expected to see the fastest growth in use, oil and natural gas will remain far more important energy sources for the world.

Due in large part to Russian oil and gas sanctions, this year has demonstrated to Western nations the importance of energy to the functioning of the global economy. When energy prices are low, it’s easy to let our dependence on energy take a back seat. But this year, the need for energy is very present in the foreground.

Same coal, the dirtiest fuel that almost everyone agrees should be phased out for power generation, is making a comeback this year. According to the IEA, coal demand has returned to its all-time high this year as European supplies of Russian gas were largely cut off.

When it comes to end users of energy, it is easy for us to think of two sources: the utility sector and transportation.

While the transport sector’s reliance on petroleum as a fuel will likely continue for a long time, the utility sector is in the midst of a rapid transition to renewable energy and battery storage.

This is largely due to a dramatic drop in the cost of producing solar panels and generating electricity from them over the past decade.

solar deployments

Solar Energy Industries Administration

Indeed, in 2021 and the first half of 2022, around 90% of all new power generation capacity added to the grid came from wind and solar.

solar energy industry

SEIA

No new coal generation capacity has been added in the United States since 2014. Since then, however, the vast majority of new additions to the grid have come from renewables and natural gas, and now the share of gas in the new additions also decreases.

There are fair criticisms of renewable energy as an unreliable energy source that is not easily dispatchable at will like fossil fuels. This is what makes natural gas so valuable as a reliable, dispatchable fuel source to complement renewables.

But it would be foolish to ignore the trend of massive growth in renewable energy generation due to the decarbonization of the utility sector.

On the other hand, consumers are not switching to electric vehicles as quickly as the utility sector is switching to renewables. Internal combustion engine vehicles, air travel, petrochemicals and other sources of demand ensure that oil will continue to be used in increasing quantities for decades to come.

This is great news for the United States, which sits on one of the largest oil and natural gas deposits in the world.

Chart
Data by Y-Charts

Moreover, while the rest of the world hasn’t increased its oil production at all in the last five years, American producers are picking up the slack.

Chart
Data by Y-Charts

Of course, even US production is still below its pre-pandemic level. But it’s worth noting that the United States is increasing its production levels faster than the rest of the world.

Like it or not, the world will almost certainly have an “all of the above” energy policy for the foreseeable future. As such, whatever your personal preference for the energy landscape, it seems likely that returns will be strong for all sorts of energy companies going forward.

The world is simply starving for energy and, as the old saying goes, “beggars can’t choose”. If the choice is between having their favorite power sources and keeping the lights on or the car running, we think most people will choose the latter.

That said, let’s take a look at two energy stocks that seem likely to continue to generate high-yielding dividends for a lifetime.

1. Clearway Energy, Inc. (CWEN, CWEN.A)

CWEN is a renewable energy production company. The business model is similar to that of a REIT, in that the company issues a combination of equity and debt to acquire stabilized renewable energy projects and distributes a large portion of their free cash flow to shareholders under form of dividend.

Recently, in a major transaction, CWEN sold its thermal power generation plants to a private equity firm. Since then, the company has reinvested just over half of the proceeds into its bread-and-butter renewable energy assets. After all proceeds are reinvested, CWEN expects its EBITDA and Cash Available for Distribution (“CAFD”) profiles to look like what you see on the right hand side below:

CWEN Portfolio

Presentation of the CWEN Q2

Although CWEN will still retain some legacy gas-fired plants in California, the bulk of its portfolio will be wind, solar and battery storage assets.

The company already has $300 million in committed capital for downside investments over the next year from its sponsor, which is renewable energy development company, Clearway Energy Group.

Additionally, CWEN’s pipeline of future investment opportunities was further expanded with the recent announcement that TotalEnergies (TTE), the French energy supermajor, has purchased half of Clearway Energy Group. This should significantly increase the number of stabilized projects available for CWEN to acquire in its portfolio.

Another $330 million in proceeds from the sale of CWEN’s thermal generation assets remain available to be deployed in new investments, and perhaps some of the proceeds will find their way into assets currently owned by TTE.

Management expects to hit the upper bound of CWEN’s annual dividend growth target of 5-8% over the next four years, largely because CWEN’s huge cash hoard reduces the need for raise new capital for investments.

What about the balance sheet?

Well, CWEN had zero fired at its credit revolver at the end of Q2 2022.

Additionally, 99% of its long-term debt is fixed rate, and the yield does not have a corporate-level maturity until 2028.

However, most of the company’s debt is non-recourse (secured) debt at the project level. Although some maturities come in 2023, the good news is that these are self-amortizing loans, which means that much, if not all, of the debt principal is repaid over the life of the loan, leaving little to repay at maturity.

CWEN debt maturities

Presentation of the CWEN Q2

Although CWEN has recently been caught in the liquidation of debt dependent companies, it is important to note that it is much more resilient than the market gives it credit for.

Between a 4.5% dividend yield and 7-8% annual growth, CWEN’s total returns should easily hit double digits going forward.

2. Kinder Morgan, Inc. (KMI)

KMI owns and operates the largest network of natural gas transmission assets in the United States, transporting approximately 40% of the gas produced in the United States.

KMI Wallet

September KMI Presentation

KMI also has a network of 141 gas terminals, but these are only used for transporting gas between US terminals rather than for export. Even so, much of the gas transported by KMI will eventually end up in liquefaction facilities that will turn it into LNG for export to places like Europe and Asia.

KMI is one of the most conservative ways to tap into the cash generated from U.S. natural gas. Nearly 95% of its cash flow is generated by stable, take-or-pay or fixed-fee contracts that do not fluctuate with commodity prices or volumetric usage. With this strategy, KMI’s primary sources of growth are pipeline additions or other means of transporting more gas from A to B. Thus, management expects dividend growth to be on average only about 3% per year.

Over the past three years, free cash flow has been very strong, yet KMI’s share price hasn’t even returned to pre-pandemic levels. This made a free cash flow (“FCF”) yield very attractive:

Chart
Data by Y-Charts

Although KMI faces a debt headwind with net debt to EBITDA of 4.3x, we expect the company to be able to offset the headwind of rising interest expense. with increased revenue and EBITDA from contractual rate increases and new projects expected to come online in the coming years. With a dividend yield of 6.5%, it doesn’t take much growth to achieve double-digit total returns.

Conclusion

The global economy needs energy, and most economic players in the world will generally go for the cheaper option, given the choice. Given the forecasted increase in energy demand over the next few decades, this likely means continued growth in the use of oil, natural gas, and renewable.

While renewables are rapidly taking market share in the utilities sector, oil and gas will continue to be heavily used in transportation, petrochemicals and (in the case of gas) as a stable source of electricity. basic and/or dispatchable energy to complement renewable energies.

With most countries in the world cutting themselves off from Russian oil and gas, it has never seemed safer to invest in the American gas space.

Similarly, with the recent passage of the “Reduction of Inflation Act”, the expansion of tax credits for renewable energy makes it likely that the utility sector and large corporations will push even more towards storing wind, solar and battery power for their energy needs in the future.

These factors make CWEN and KMI seem like great ways to generate a growing stream of passive income throughout life. While not our top picks for either sector, we at High Yield Investor consider them both strong buys today.

About Keith Tatum

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